Inside 208

Early Friday morning the legislature acted to pass a final version of the FY25-26 budget. The votes had wide bipartisan margins in both chambers, but there were some questions in the Senate particularly about the new wholesale tax on marijuana. The Governor is now expected to review and sign the final budgets before the continuation budget expires on October 8.

In addition to our blog we posted on Friday, below are some additional details on the budget. Click here for the House Fiscal Agency’s document summarizing the budget, and click here for the Senate Fiscal Agency’s analysis.

Continuation Budget

The short, one week, budget that was passed the morning of Oct. 1 has allowed the state to keep ongoing normal operations. The continuation budget was only for a week and expires on October 8th, which gave the legislature the breathing room to pass a full budget, and the Governor to review and sign.

FY25-26 Budget

Details were kept extremely close by leadership negotiating the final budget, even rank and file members of the legislature had little knowledge of the budget’s contents going into the day it was voted on. However, despite the quick movement, the House’s Omnibus budget, House Bill 4706, passed the House 101-8 and the Senate 31-5. The Senate’s Education Omnibus, Senate Bill 106, passed the Senate 31-5 and the House 104-5.

Some of the highlights of the budget include:

Revenue Sharing

Due to gas tax shifts in the transportation plan, constitutional Revenue Sharing decreased by $63.6M (6%). City, Village and Township Revenue sharing maintains current year formula and funding. County Revenue Sharing maintains current year formula and funding. The legislature did not backfill the loss to constitutional revenue sharing but did add new public safety and road funding dollars.

Public Safety Revenue Sharing

• $50 million ongoing for public safety revenue sharing grants
  • $3,250,000 Community Violence Intervention Programs.
  • $35,000,000 is distributed to cities, villages and townships based on violent crime data for public safety.
  • $11,700,000 is distributed to counties on an inverse taxable value formula for public safety.

• $20 million one-time for public safety revenue sharing grants
  • $10,000,000 is for the Michigan Commission on Law Enforcement Standards for competitive scholarships for police academy enrollees/salaries of academy recruits.
  • $7,500,000 is distributed to cities, villages and townships based on violent crime data for public safety.
  • $2,500,00 is distributed to counties on an inverse taxable value formula for public safety.

Finally, here are two documents that include community by community numbers for constitutional revenue sharing, statutory revenue sharing, public safety resources. The numbers are preliminary and a snapshot of the budget that are likely to vary based on actual revenue collections and updated crime data. We will provide new numbers as they become available.

• Initial Estimates of FY 2025-26 Revenue Sharing Payments – Cities, Villages, and Townships
• Initial Estimates of FY 2025-26 Public Safety Revenue Sharing Grants – Cities, Villages, and Townships

To determine your estimated net impact on revenue sharing, add your new public safety revenue sharing dollars to the change in your constitutional payment.

Roads Deal

A major move inside the budget deal was greater spending on roads. There were three major components of the new and shifted funding:

1. A shift to move the sales tax on gasoline off fuel and replace it with a 20-cent increase in tax on fuel. This removes the 6% sales tax on gas and now dedicates 100% of that tax paid at the pump to transportation. There were broad concerns as this shift creates a hole of approximately $1B in sales tax revenue to schools, local government, transit, and the general fund. School funding was backfilled, but local governments will see a shortfall of $63M in constitutional revenue sharing.
2. An increase in the excise tax on marijuana, current taxes are 10% retail tax (plus 6% sales tax), but the deal now also creates a 24% wholesale tax on marijuana products. This move was opposed by the cannabis industry as the market in Michigan is already oversaturated. This was likely the riskiest part of the budget deal with the vote in the Senate seen as particularly contentious, but they were able to pull the votes together. This is estimated to raise $420M in new revenue for roads.
3. The state will decouple from federal business tax reductions that were undertaken in the Trump Administration’s One Big Beautiful Bill. While this is not considered a tax increase, the bill will slow the tax decreases down for businesses with the gap going to roads. This is estimated to raise roughly $600M for roads and will increase to around $1B over a five-year phase in.

The roads deal also contained significant dollars for a new portion of transportation funding for local roads. When fully phased in, cities and villages will see $400M in new funding.

Click here for first year estimates of increases for cities and villages. In the first year, funding for cities and villages will increase by approximately 33.4% and will reflect collection from three-quarters of a year’s revenue due to the proposal beginning three months after the start of the fiscal year. This will lead to another significant increase in year two before leveling off in years three through five. In year five, cities and villages will see about a 54% increase over current allocations.

Local transit agencies received an additional $44.8M for local bus operations in new revenue. This creates a new baseline for funding, and not one-time dollars. Transit agencies see this as a win and it will hold them harmless from funding losses. Additionally, there is $$325M over 5 years in a new infrastructure projects authority fund, that could engage in transformational mobility projects. Public transit sees these items as major wins for public transit in Michigan.

Other Budget Highlights

Free school meals: The final budget will include funding to continue the state’s universal free school meals program.

School Funding: The budget will include $10,050 in per-pupil spending for the 2026 fiscal year, up from $9,608. Cyber Charter Schools are provided with funding parity in this budget and will also receive $10,050 per student. Also included is $321 million for private and public school safety and mental health programs. The budget also includes 25% increases in at-risk funding and English language learner funding.

No tax on tips, “ghost employees”: Republicans scored wins including exemptions on tips, overtime, and Social Security from the state income tax. They also agreed to lower FTE caps, meaning 1,800 unfilled government jobs will be eliminated. There were additional changes to policies in all departmental budgets surrounding return to the office plans for state employees, these require departments to prioritize in-person work and ensure staff is working appropriate hours.

Selfridge Air National Guard Base funding, storm recovery: The budget included $26M to support a new F-15EX fighter mission at Selfridge Air National Guard Base, along with $14M for ice storm recovery money for northern Michigan.

2024-25 Supplemental Appropriations: Interestingly, instead of passing a separate supplemental budget, House Bill 4706 includes $2.5B in supplemental appropriation adjustments to multiple state department budgets for FY 2024-25. This includes the allocation of a $129.1M Climate Pollution Reduction Grant awarded to the state in 2023, which will be used to fund the Renewables Ready Communities Awards that provides grants to communities for wind, solar, and energy storage facilities.

Earmark transparency: The budget deal will likely make permanent rules for requested budget earmarks to be made public before a final vote. Senate Democrats agreed to House Republican reforms earlier this week and then made hundreds of millions of dollars in requests public ahead of the vote. Final earmarks, also known as Legislatively Directed Spending Initiatives (LDSIs), were negotiated in the budget and details are attached in a table at the end of the attached HFA document (pages 232-234).

Major Reductions

In addition to major reductions and shifts in revenue sharing there were several cuts in funding to departments. Gross funding for DHHS would fall by $7.62B with nearly $6B coming from a decline in federal funds.

The other department facing significant reductions is Labor and Economic Opportunity (LEO), where funding would fall $690M from last year. We would note that the popular GoingPro talent program took a $22.9M reduction and was moved to be a one-time funding item.

This has been a hard and grueling budget season. It forced us to defend the value of investing in local government, speak to the importance of having quality local roads, and vigorously advocate on your behalf. The progress we made on our priorities, especially in the last few weeks, is proof of their importance to our cause.

John LaMacchia is the League’s director of state & federal affairs. He can be reached at [email protected] or 517-908-0303.